Commercial Mortgage Quick Reference Guide

CapEx: Capital Expenditures

Capital expenditures, or CapEx, are typically large investments in a property that will extend its economic life. For instance, replacing the windows in a building or installing a new heater would usually be considered CapEx, as these building elements may need to be replaced someday, but not for a significant period of time.

Other common capital expenditures include spending money to replace or significantly repair flooring, electrical systems, plumbing systems, and ductwork. Funds that are used to upgrade the property to make it more valuable also count under CapEx. This could include adding new equipment to an industrial facility to make it more attractive to potential tenants or to induce current tenants to extend their lease.

Capital Expenditures and Accounting

In general, capital expenditures must be capitalized, which means they will spread the cost of the asset out over its estimated economic life. Despite this, if a capital expenditure only maintains part of a building in its current condition (i.e. expensive roof repairs that only fix a problem and don’t extend the roof’s economic life), the expenditure can be deducted in the year in which it is made. In this way, certain types of capital expenditures act like operational expenditures, or OpEx, which generally refers to any expenses involving smaller repairs, payroll, and maintenance.

Commercial and Multifamily Investors Should Factor CapEx Into Rent Pricing

One of the biggest mistakes made by less experienced commercial and multifamily real estate investors is failing to incorporate capital expenditure costs into their rent pricing. Investors may believe that they will benefit by charging rent prices significantly lower than their competitors, but often, they are shortchanging themselves, as they may not be able to afford to make significant repairs if part of an important building component fails or needs unexpected repairs (i.e. a leaking roof or a failed AC system).

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